Acquisitions are lowest priority for international growth

March 9, 2012

Although Walmart International has completed three acquisitions during the past 12 months, it is actually the least preferred method of growth, according to international division CFO Cathy Smith. Just imagine if acquisitions were the top priority.

Smith’s comments about acquisitions came earlier this week at a Raymond James and Associates investor conference where she appeared with treasurer Jeff Davis and detailed four dimensions of Walmart’s international growth strategy.

The top priority, according to Smith, is to generate same-store sales growth as a means to leverage returns on existing assets followed by new store growth. This year in what promises to be Walmart’s most aggressive organic expansion ever, the company will add between 30 million and 33 million sq. ft. of new selling space on top of the 22 million it added last year, according to Smith. After comps and new stores, the third priority is e-commerce.

“The fourth form of growth we think about our acquisitions,” Smith said. “Many people think of acquisitions as our first form, but it’s not. It’s the last one we choose because it’s our most inefficient use of capital.”

Perhaps this is a new direction going forward or some type of high finance posturing on Walmart’s part to appear disinterested in potential takeover targets, because there’s no denying that acquisitions were historically a preferred method of growth. The international division would be a fraction of the size ($126 billion) it is today if it were not for acquisitions. Since the inception of the international division some 20 years ago, Walmart has relied on acquisitions as a means to enter new markets (Canada, the United Kingdom, Japan, Central America, Chile, South Africa) or quickly build scale in markets that were entered through greenfield development (Brazil, China).

Walmart’s international track record is all about acquisitions so it is easy to see why investors might be confused about the prioritization of growth. In the past 12 months, Walmart acquired a majority ownership stake in Chinese online grocer Yihaodian, acquired 39 former Zellers store leases from Target in Canada, acquired Massmart in South Africa and acquired Netto stores in the United Kingdom to complement Asda stores that had also been acquired through acquisition in 1999.

Walmart now has a presence in enough markets that it could probably grow organically for at least the next decade without the need to enter a new market or expand in an existing market via acquisition. At least that is what it would like the marketplace to believe because it feeds into the company’s ability to be opportunistic in its approach to international dealmaking and avoid paying asset price that have been inflated because the company telegraphed its growth intentions.

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